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Construction on new homes dives 16% in January

WASHINGTON (MarketWatch) -- Construction on new U.S. homes tumbled 16% in January to a seasonally adjusted annual rate of 880,000, with drops for single-family homes and apartments, according to government data released Wednesday.

Particularly poor weather hit construction last month, according to economists polled by MarketWatch, who had forecast a starts rate of 945,000 for January, compared with an originally estimated rate of 999,000 for December. On Wednesday, the U.S. Commerce Department upwardly revised December’s starts rate to 1.05 million.

Construction on new U.S. homes has pulled back since soaring in November to the fastest pace since 2008. January’s rate was the lowest since September, and was down 2% from the year-earlier period.

But there may be better news in coming months: Residential projects delayed during a particularly tough winter could show up in the spring, economists say.

“We believe this setback will prove to be temporary and activity will rebound in the months ahead. More clarity on the future path of interest rates alongside stronger housing demand should prove supportive for future construction, with housing starts expected to hit 1.2 million mark by year end,” said Ksenia Bushmeneva, an economist with TD Economics.

The starts rate fell in three of four U.S. regions last month, plunging 68% in the Midwest to a record low, and falling 17% in the West and 13% in the South. Meanwhile, the starts rate rose 62% in the Northeast. (A note of caution: confidence intervals for the regions are substantial — a whopping plus or minus 58% in the Northeast.) Morgan Stanley economists noted that the Northeast surge reflects unusually large growth for apartment construction, a volatile category.

Poor weather clouds housing trends

Unfortunately, the poor weather, which analysts think has also hit retail sales, makes it difficult to clearly identify trends that underlie the monthly volatility. Declining affordability may also be behind some recent sputtering in the housing market. Other challenges for 2014 are recent weak reading for job growth, and new mortgage rules for would-be buyers and lenders.

The construction data follow a Tuesday report that showed sentiment among home builders plunged this month, thanks to worries over current home sales. Indeed, government data released Wednesday showed that building permits, a sign of future demand, fell 5.4% in January to an annual rate of 937,000, the lowest since August. Permits dropped for single-family homes and apartments.

A somewhat worrisome report on the U.S. economy indicated that chunks of the housing market faltered in the fourth quarter, with fixed residential investment subtracting from growth of U.S. gross domestic product for the first time in more than three years. However, details of the government’s GDP report showed that the level of real investment in home construction was just about unchanged last quarter, while home improvements and brokers’ commission fell last quarter.

On the positive side for construction and home sales in 2014, some banks are making it easier to obtain a mortgage, hungry for the mortgage revenue that they lost when rates rose last year, sinking refinancing applications. Also, pent-up demand remains high even as housing inventory remains low. And the pipeline of foreclosures is dropping.

Looking longer term, housing starts are far higher than a post-bubble rate that hit a bottom of less than 500,000 in 2009. Indeed, high affordability and a rebounding economy have encouraged builders and buyers, and last year saw the most sales of new single-family homes since 2008.

Still, home-construction rates remains relatively low. Economists estimate that roughly 1.7 million starts per year are needed to keep up with population growth and meet demand for replacement and second homes. During the bubble, starts soared above that level, hitting a peak rate of almost 2.3 million in early 2006.

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